Dean Baker: Blame it on the bubble

[marmar]

from the Guardian UK:



Blame it on the bubble
The financial crisis is just a sideshow – the real reason for the economic downturn is the rise and demise of the housing bubble

Dean Baker
guardian.co.uk, Monday 8 March 2010


Politicians and the media continue to refer to the economic downturn as being the result of a financial crisis. This is wrong. We have 15 million people out of work because the housing bubble that drove the economy since the last recession finally burst. The financial crisis may have been good entertainment for those who like to see huge banks collapse, but it was a sidebar. The real story was the rise and demise of the housing bubble.

Those who claim that the real problem was the financial system and its faulty regulation can be disproved with a single word: Spain.

Spain is noteworthy because it now has an unemployment rate of more than 19%, the highest rate in any of the wealthy countries. Spain did not have a financial crisis. In fact, its well-regulated financial system is often held up as model for the United States.

Spain did have a horrific housing bubble. As a result, the share of construction in the economy rose from less than 8% of GDP at the end of the 90s to 12.3% in 2007. By comparison, it is typically less than 6% of GDP in non-bubble years in the United States. This rapid rate of construction led to enormous overbuilding, which meant that a collapse was inevitable with construction falling to far below normal levels. .........(more)

The complete piece is at: http://www.guardian.co.uk/commentisfree/cifamerica/2010/mar/08/financial-crisis-subprimecrisis

[DJ13]

1. Mr. Baker doesnt take it far enough

There were reasons, uncomfortable to the elite reasons, the housing bubble burst.

Rising home prices were only one of the reasons, there was also the fact that productivity was up dramatically while wages declined relative to inflation which squeezed household incomes ever tighter, that eventually reached the breaking point when the speculators drove energy prices up to absurd levels to make a quick profit in 2008.

Solving the housing crisis wont solve the real reasons the economy went to hell, and as long as certain segments of our society continue dancing around the edges instead of dealing with the uncomfortable truth that the upper classes caused the crisis by taking too much for themselves there wont be a fix for this crisis.

[FarCenter]

2. A lot of housing was being built far from jobs

And when gas went to $4 / gallon, those houses didn't look so attractive any more.

[depakid]

3. Look at Ireland

As a new research paper by the Irish economists Gregory Connor, Thomas Flavin and Brian O’Kelly points out, “Almost all the apparent causal factors of the U.S. crisis are missing in the Irish case,” and vice versa. Yet the shape of Ireland’s crisis was very similar: a huge real estate bubble — prices rose more in Dublin than in Los Angeles or Miami — followed by a severe banking bust that was contained only via an expensive bailout.

Ireland had none of the American right’s favorite villains: there was no Community Reinvestment Act, no Fannie Mae or Freddie Mac. More surprising, perhaps, was the unimportance of exotic finance: Ireland’s bust wasn’t a tale of collateralized debt obligations and credit default swaps; it was an old-fashioned, plain-vanilla case of excess, in which banks made big loans to questionable borrowers, and taxpayers ended up holding the bag.

So what did we have in common? The authors of the new study suggest four “ ‘deep’ causal factors.” First, there was irrational exuberance: in both countries buyers and lenders convinced themselves that real estate prices, although sky-high by historical standards, would continue to rise.

Second, there was a huge inflow of cheap money. In America’s case, much of the cheap money came from China; in Ireland’s case, it came mainly from the rest of the euro zone, where Germany became a gigantic capital exporter.

Third, key players had an incentive to take big risks, because it was heads they win, tails someone else loses. In Ireland this moral hazard was largely personal: “Rogue-bank heads retired with their large fortunes intact.” There was a lot of this in the United States, too: as Harvard’s Lucian Bebchuk and others have pointed out, top executives at failed U.S. financial companies received billions in “performance related” pay before their firms went belly-up.

But the most striking similarity between Ireland and America was “regulatory imprudence”: the people charged with keeping banks safe didn’t do their jobs. In Ireland, regulators looked the other way in part because the country was trying to attract foreign business, in part because of cronyism: bankers and property developers had close ties to the ruling party.

http://www.nytimes.com/2010/03/08/opinion/08krugman.html

[izquierdista]

5. Performance related pay

The French invented a machine for this over two centuries ago:

[depakid]

4. dupe